Commentary: Big tech tries to muscle FASB

A proposal by the accounting standards board could smother the American dream of starting a business, or owning a home or going to school, they said.

It could mean "nuclear winter" for the tech industry, one congresswoman said.

And it could reverse the trend toward significant employee ownership, what some called "partnership capitalism."

Overheated rhetoric and doomsday scenarios? Not to the lawmakers and industry representatives who organized a roundtable discussion on Capitol Hill about the accounting treatment of stock options.

The discussion was meant to be a blunt lesson in politics for the object of their scorn -- Robert H. Herz, chairman of the Financial Accounting Standards Board.

Herz was supposed to meekly listen to their complaints that his board could threaten the vitality of the economy with its "reckless" quest to force the tech industry to put billions of dollars of employee compensation on its books. Read more.

The message to Herz: One way or the other, the combined power of Washington and Silicon Valley will prevail over the FASB, just as it did in 1994 when the Congress blocked a proposed rule that would have closed the stock option loophole.

Herz, however, refused to go along with the script.

He insisted that he is open-minded about a solution to how to properly account for the value of stock options. But he wouldn't back down on his "strong personal belief" that stock options are a cost that companies must expense in their financial reports to the Securities and Exchange Commission.

Herz said the FASB, the quasi-public group that writes the generally accepted accounting procedures and standards, are scheduled to have a final proposal on the expensing of stock options by the fall.

Sens. Barbara Boxer, D-Calif., George Allen, R-Va., and John Ensign, R-Nev., have introduced a bill that would block the FASB rule by requiring the SEC to study the issue for three years. The bill is gaining support as big technologies companies enlist the support of the other business lobbying groups. Read more.

Some have suggested that the current rules on stock options encouraged the stock market bubble. As Federal Reserve Chairman Alan Greenspan has said, "At least some of the unsustainable euphoria that surrounded dot-com investing at its peak may have been exacerbated by questionable reported earnings."

Profits of the S&P 500 companies would have been 10 to 20 percent lower than reported if companies had been forced to write down the costs of stock options, according to estimates from Standard & Poor's and other analysts.

But the defenders of stock options say investors aren't fooled by as-reported earnings, because the costs of options are explained in a footnote in annual reports.

Further, they say, there's no good way to accurately value the cost of giving someone an option to buy shares at a set price many years in the future. How does the company account for options that are "underwater" and never likely to be exercised?

"It just doesn't make sense" to force companies to reduce their earnings for options that may never be exercised, said James Barksdale, a venture capitalist who held top positions at Netscape, FedEx
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and McCaw Cellular.

The tech executives say options aren't a cost to companies at all, but to the shareholders. "The cost is borne by the shareholders" through dilution of their ownership, said Dennis Powell, senior vice president at Cisco Systems
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Every other form of compensation, including stock grants, are now expensed, Herz said. The inequality of accounting treatment created an unlevel playing field that encouraged companies to grant stock options instead of compensating employees in more straight-forward ways.

If employees and their abilities are major assets of tech companies, the books ought to reflect the costs of acquiring that capital, Herz said. When companies use stock to buy real assets such as buildings or inventories or even intangibles like goodwill, the cost is reflected on the books, he said. Human capital should be treated no differently.

Expensing options would lead to many fewer options being granted, making it harder for U.S. companies to attract, retain and motivate the top talent, Barksdale said.

"I don't think there could be a worse time to adopt such a policy," said John Doerr, a venture capitalist at Kleiner, Perkins, Caufield and Byers.

"America is now numbers 1, 2 and 3 in every important technology," Doerr said. Expensing would "set back American innovative leadership in a major way," opening up the way for entrepreneurs in Taiwan, Singapore or even China to take the lead.

The innovation that allowed American smart bombs and unmanned airplanes to overwhelm Taliban and Iraqi defenders was the direct result of putting a value -- but not a cost -- on stock options, Sen. Allen said.

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